Newsletter – January 2016
/在： 合規通訊 /通過： Tony Chan- SFC reprimands and fines Lui Chi Hang HK$300,000
- Licence applicant convicted of providing false or misleading information to SFC
- SFC bans Steven John Barrett for 10 months
- Court freezes bank accounts of suspected boiler rooms
- Court finds two solicitors engaged in insider dealing and fraud or deception
- SFC bans Liu Hsiang-wen for eight months
1. SFC reprimands and fines Lui Chi Hang HK$300,000
On 6 January 2016, the SFC after investigation reprimanded and fined Mr Lui Chi Hang HK$300,000 for failing to follow the account opening procedures and for lending money to a client in personal capacity in breach of the SFC Code of Conduct.
Background
The SFC has reprimanded and fined Mr Lui Chi Hang HK$300,000 for account opening failures and lending money to a client.
The disciplinary action follows an investigation by the SFC which found that Lui, a former relationship manager of ABN Amro Bank N.V. (the Bank), failed to follow the account opening procedures required under the Code of Conduct to verify the identities of his clients who resided in Taiwan.
The SFC also found that Lui had a potential conflict of interest by lending money to a client in his personal capacity on three occasions.
The SFC is of the view that Lui’s conduct fell short of the standard expected of him under the Code of Conduct and was also in breach of the Bank’s internal policies.
In deciding the disciplinary sanction, the SFC took into account Lui’s cooperation with the SFC in resolving the disciplinary action and his otherwise clean disciplinary record.
The case was referred to the SFC by the Hong Kong Monetary Authority.
Comment
Paragraph 5.1 of the Code of Conduct for Persons Licensed by and Registered with the SFC (Code of Conduct) requires a licensed or registered person to take all reasonable steps to establish the true and full identity of each of its clients. In particular, when the account opening documents are not executed in the presence of the licensed or registered person, the new client’s identity must be verified by following the procedures set out under paragraph 5.1 of the Code of Conduct.
General Principle 6 of the Code of Conduct requires that a licensed or registered person should try to avoid conflicts of interest, and when they cannot be avoided, should ensure that his clients are fairly treated.
General Principle 2 of the Code of Conduct requires a licensed or registered person to act with due skill, care and diligence, in the best interests of his clients and the integrity of the market.
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR1
2. Licence applicant convicted of providing false or misleading information to SFC
On 7 January 2016, a licence applicant was convicted of providing false or misleading information in his SFC licence application.
Background
The Eastern Magistrates’ Court convicted Mr Zheng Kai of making false or misleading representations in his licence application to the SFC.
Zheng was fined HK$5,000 after pleading guilty. The court also ordered him to pay the SFC’s investigation costs.
The SFC found that, on 2 September 2014, Zheng made a false or misleading representation in support of his licencing application in that he stated he had resigned from his previous employment. In fact, his previous employer summarily dismissed him because he submitted a false sick leave certificate.
The SFC expects applicants to make full and accurate disclosure of all information required to be submitted with a licence application. Failure of applicants to do so might affect their fitness and properness to be licensed.
Comment
Under section 383 of the Securities and Futures Ordinance, a person commits an offence if he, in support of any application made to the SFC, makes a representation that is false or misleading in a material particular and he knows that, or is reckless as to whether, the representation is false or misleading in a material particular.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR2
3. SFC bans Steven John Barrett for 10 months
On 13 January 2016, the SFC banned Steven John Barrett for 10 months following investigation of him concealing personal trading activities from his employers.
Background
The SFC has banned Mr Steven John Barrett from re-entering the industry for 10 months from 13 January 2016 to 12 October 2016.
The disciplinary action follows a SFC investigation which found that, from April 2010 to September 2013, Barrett concealed from his two former employers – Black’s Link Capital Limited and Myriad Asset Management Limited – his personal securities transactions by conducting them through the personal securities account of his friend, Fabiano Hugues Joseph Mascolo, a licensed representative of another firm at the material time.
Barrett’s conduct circumvented the employee dealing policies of his employers and made it difficult for them to identify and monitor his personal trading activities to ensure there were no conflicts of interests or other malpractices arising from his personal trading activities.
The SFC considers Barrett’s conduct, which fell short of the standards required of him, calls into question his fitness and properness to be a licensed person.
In deciding the penalty, the SFC has taken into account that Barrett’s concealment of his personal trading activities from his employers was deliberate and dishonest.
Comment
Paragraph 12.2 of the Code of Conduct for Persons Licensed by or Registered with the SFC requires licensed corporations to implement procedures and policies on employee trading and to actively monitor the trading activities in their employees’ accounts and their related accounts.
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR3
4. Court freezes bank accounts of suspected boiler rooms
On 15 January 2016, the Court of First Instance granted interim injunctions to freeze the bank accounts of suspected fraudulent boiler rooms.
Background
The SFC obtained interim injunctions in the Court of First Instance freezing approximately HK$600,000 in bank accounts suspected of receiving monies from investors of alleged frauds known as boiler rooms.
The Court has also granted the SFC’s application for interim orders to restrain the following entities from holding themselves out as carrying on regulated activities whilst unlicensed and suspending their websites:
- Waldmann Asset Management (Waldmann) using the website www.waldmann-asset-management.com
- Doyle Hutton Associates (Doyle) using the website www.doyle-hutton-associates.com
- Cardell Limited and/or Cardell Company Limited (Cardell) using the website www.cardell-limited.com
The interim orders protect the monies in bank accounts held by Cardan Limited, Cedan Limited, Hamtron Limited and Mutual Hope Limited which allegedly hold the proceeds of unlicensed or boiler room activities being carried out by Waldmann, Doyle and Cardell.
The interim orders will remain in force until the hearing of the SFC’s application for final orders against all the parties, the date of which has yet to be fixed.
The proceedings were brought under section 213 of the Securities and Futures Ordinance (SFO) in which the SFC is seeking final orders against Waldmann, Doyle and Cardell including permanent injunctions and other orders to provide relief to any victims.
The SFC’s investigation is continuing.
Comment
Boiler rooms usually claim to be licensed for regulated securities or futures business and issue related advertisements when they are not licensed or actually in that jurisdiction. Under section 114(1)(b) of the SFO, it is an offence for a person to hold himself out as carrying on a business in a regulated activity without a licence. Under section 109 of the SFO, it is an offence to issue a related advertisement.
The usual way a boiler room works is that they call investors claiming to be in Place A, but are actually in Place B. They ask the investors to invest in a financial product in Place C and to send money to an account in Place D. Often a boiler room will transfer money received from the investors from an account in one place to an account in another place almost as soon as it has been received. By the time the fraud has been discovered, the money has disappeared or been transferred out of reach.
There is an Alert List on the SFC website which lists firms which are unlicensed in Hong Kong and are suspected to be targeting Hong Kong investors or claim to have an association with Hong Kong.
For the SFC’s alert list, please refer to:
http://www.sfc.hk/web/EN/alert-list/
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR4
5. Court finds two solicitors engaged in insider dealing and fraud or deception
On 15 January 2016, two solicitors were convicted by the Court of First Instance of engaging in insider dealing and fraud or deception in transactions.
Background
The Court of First Instance found that two solicitors, Mr Eric Lee Kwok Wa and Ms Betty Young Bik Fung, and Eric Lee’s sister, Ms Patsy Lee Siu Ying, contravened the Securities and Futures Ordinance (SFO) by insider dealing in the shares of Asia Satellite Telecommunications Holdings Ltd (Asia Satellite) and engaged in fraud or deception in transactions involving securities of Hsinchu International Bank Company Ltd (Hsinchu Bank).
The court’s decision is a landmark ruling on the interpretation of section 300 of the SFO which prohibits the use of fraudulent or deceptive schemes in transactions involving securities.
The SFC started civil proceedings in the court against Eric Lee, Betty Young, Patsy Lee and Ms Stella Lee, both sisters of Eric Lee, in December 2010 under section 213 of the SFO and alleged the defendants made a total profit of HK$2.9 million in these transactions.
The SFC alleged that, in relation to Hsinchu Bank transactions in September 2006:
- Betty Young obtained information about a tender offer for Hsinchu Bank shares while working as a lawyer seconded to a client of her employing law firm;
- the client she was seconded to intended to make the tender offer and she was working on the offer;
- the information about the offer was non-public, confidential and materially price sensitive;
- subsequently, Betty Young bought Hsinchu Bank shares and tipped off Eric Lee and his sisters to buy the shares before the announcement of the tender offer; and
- this amounted to fraud or deception under section 300 of the SFO because Betty Young owed duties to her employer and their client including the duty to refrain from using such information for personal gain.
The SFC further alleged that, in relation to Asia Satellite transactions in February 2007:
- Eric Lee obtained information about the proposed privatization of Asia Satellite shares when the law firm he worked for advised on this transaction;
- that information was non-public, confidential and materially price sensitive;
- subsequently Eric Lee tipped off Betty Young and his sisters to buy Asia Satellite shares before the announcement of the proposed privatization; and
- this amounted to insider dealing under section 291 of the SFO.
The court found that these allegations were proven against Betty Young, Eric Lee and Patsy Lee.
The court ruled that there was not enough evidence to prove the allegations against Stella Lee. Nevertheless, the court may exercise its power under section 213 of the SFO against her to remove the illicit profit from her and restore the victims in the transactions. The court may make orders under section 213 against people who are knowingly or otherwise involved in a contravention of the SFO.
The SFC and the defendants are directed to jointly work out the precise terms of the final orders in view of the judgment.
The court also directed that a copy of the judgement be sent to the Law Society of Hong Kong because Eric Lee and Betty Young are both member of the Law Society.
For a copy of the court judgment (HCMP 2575/2010), please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR5
6. SFC bans Liu Hsiang-wen for eight months
On 25 January 2016, Liu Hsiang-wen was banned for eight months by the SFC for failing to disclose her criminal conviction.
Background
The SFC has banned Ms Liu Hsiang-wen from re-entering the industry for eight months from 19 January 2016 to 18 September 2016.
The SFC found that Liu had failed to notify the SFC of her criminal conviction in Taiwan in 2010 for promoting and selling offshore funds to Taiwan investors without regulatory approval when she was a licensed representative accredited to CITIC Securities Brokerage (HK) Limited and CITIC Securities Futures (HK) Limited.
The SFC also found that Liu had made false declarations to the Bank of East Asia Limited, her subsequent employer, in that she did not disclose the criminal conviction in the job application form and self-declaration form submitted to the bank in 2012.
The Hong Kong Monetary Authority has provided assistance in the investigation of this case.
Comment
Section 4 of the Securities and Futures (Licensing and Registration) (Information) Rules requires a licensed representative to give notice in writing to the SFC within seven days where there is change to the relevant information, including criminal charge in Hong Kong or elsewhere, of the licensed representative.
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR6
The article is for general information purpose only and is not intended to constitute legal or other professional advice.
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Newsletter – December 2015
/在： 合規通訊 /通過： Tony Chan- SFC signs MoU with ESMA on cooperation arrangements and exchanges of information on derivatives contracts reported to trade repositories
- Market Misconduct Tribunal hands down decision on Asia TeleMedia Limited case
- SFC proposes to expand short position reporting
- SFC issues second-quarter report
- SFC publishes consultation conclusions on client agreement requirements
- Court dismisses appeal by a substantial shareholder against convictions for failing to make disclosure of interests
- SFC obtains interim court orders against Maxim Trader
- SFC reprimands and fines three JP Morgan entities a sum of HK$30 million for regulatory breaches
- SFC authorizes first batch of funds under Mainland-Hong Kong Mutual Recognition of Funds initiative
- Takeovers Panel rules on general offer obligation for The Cross-Harbour (Holdings) Limited
- SFC bans Suen King Shan for four years
- SFC signs MoU with CFTC to enhance supervision of Cross-Border Regulated Entities
- SFC suspends Fabiano Hugues Joseph Mascolo for three months
1. SFC signs MoU with ESMA on cooperation arrangements and exchanges of information on derivatives contracts reported to trade repositories
On 19 November 2015, the SFC signed a Memorandum of Understanding (MoU) with the European Securities and Markets Authority (ESMA).
Background
The SFC has entered into a MoU with the ESMA to facilitate information exchange in relation to information on derivative contracts held in trade repositories in Hong Kong and the European Union.
The MoU allows the SFC and ESMA to have indirect access to information on derivatives contracts in order to fulfil their respective responsibilities and mandates.
For a copy of the memorandum, please refer to:
http://www.sfc.hk/web/TC/files/ER/PDF/ESMA-SFC%20indirect%20access%20to%20TR%20data.PDF
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR115
2. Market Misconduct Tribunal hands down decision on Asia TeleMedia Limited case
On 26 November 2015, the Market Misconduct Tribunal (MMT) held that the former executives of Asia TeleMedia Limited (ATML) had not engaged in insider dealing.
Background
The MMT handed down its decision that three former executives of ATML (now known as Reorient Group Limited), Mr. Yiu Hoi Ying, Ms. Marian Wong Nam and Ms. Cecilia Ho King Lin, had not engaged in insider dealing in the shares of ATML in 2007.
The MMT also decided that it was not possible to decide whether ATML’s former chairman, Mr. Lu Ruifeng, had engaged in insider dealing as, owing to evidence of acute illness, he was not given a reasonable opportunity of being heard.
The SFC is studying the report.
The MMT will later hear from the parties as to the costs of the proceedings.
For a copy of the MMT’s report, please refer to:
http://www.mmt.gov.hk/eng/reports/Report_of_ATML_e.pdf
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR116
3. SFC proposes to expand short position reporting
On 27 November 2015, the SFC launched a consultation on the scope of short position reporting with a proposal to expand the regime.
Background
The SFC launched a consultation on the scope of short position reporting, which the SFC proposes to extend to all securities that can be short sold under the rules of The Stock Exchange of Hong Kong Limited (SEHK).
Under the proposed expanded regime, which will also cover collective investment schemes (CIS), the reporting threshold for stocks will remain unchanged, while the threshold for CIS will be set at HK$30 million.
“We have seen growth in short selling since the short position reporting regime was introduced in 2012. The expanded regime will help improve monitoring and enhance market transparency, and this will be conducive to the long-term development of the industry,” said Mr. Ashley Alder, the SFC’s Chief Executive Officer.
The public is invited to submit their comments to the SFC by 31 December 2015. Written comments may be submitted online via the SFC website (www.sfc.hk), by email to [email protected], by post or by fax to 2521 7917.
Comment
Readers should note that the Securities and Futures (Short Position Reporting) Rules at present apply to constituents of the Hang Seng Index and Hang Seng China Enterprises Index as well as other financial stocks specified by the SFC.
For a copy of the consultation paper, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=15CP6
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/doc?refNo=15CP6
4. SFC issues second-quarter report
On 7 December 2015, the SFC published the quarterly report for July to Sep 2015 which placed focus on the launch of the Mainland-Hong Kong Mutual Recognition of Funds scheme.
Background
The SFC published its Quarterly Report summarising key developments from July to September 2015.
Among the highlights featured in the report was the launch of the Mainland-Hong Kong Mutual Recognition of Funds scheme on 1 July. A symposium was organised to provide further details to the industry and discuss opportunities presented by the scheme.
The SFC’s Intermediaries Division was reorganised during the quarter to allow for greater specialisation and a more proactive supervisory focus around key market segments.
In July, the SFC launched a consultation on proposed changes to financial resources rules for licensed corporations. In September it began a joint consultation with the Hong Kong Monetary Authority on mandatory clearing and reporting for over-the-counter derivatives transactions.
The SFC’s annual Fund Management Activities Survey for 2014, released in July, showed that Hong Kong’s combined fund management business experienced 10.5% growth year-on-year.
The SFC received 2,416 licence applications this quarter, up 20% from the same period last year. Sixty-one listing applications were received under the dual filing regime, an annual increase of 35%.
On the enforcement front, three licensed corporations were disciplined, resulting in total fines of HK$19.9 million. The SFC also started the first-ever proceedings in the Market Misconduct Tribunal over a listed company’s breach of its obligation to announce inside information.
For a copy of the quarterly report, please refer to:
http://www.sfc.hk/web/EN/files/ER/Reports/QR/201507-09/Eng/00_full_pdf.pdf
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR118
5. SFC publishes consultation conclusions on client agreement requirements
On 8 December 2015, the SFC released consultation conclusions on the Further Consultation on the Client Agreement Requirements. The incorporation of a new clause into client agreements is set to be required as proposed.
Background
The SFC released consultation conclusions on the Further Consultation on the Client Agreement Requirements.
Having carefully considered all the respondents’ comments, the SFC has decided to proceed with the proposal to require the incorporation of a new clause into client agreements.
In response to requests for clarification of the definition of “financial product” referred to in the new clause, a further note will be added to define the ambit of the term.
Mr. Ashley Alder, the SFC’s Chief Executive Officer, commented: “The new clause enables an investor to claim for damages under the client agreement where the regulated intermediary solicits the sale of or recommends a financial product which is not reasonably suitable. The changes will result in fairer terms of business for investors, and also prevent intermediaries from misdescribing the actual services provided to the client.”
“We expect all intermediaries to commence reviewing and revising their client agreements immediately,” Mr. Alder added. “Intermediaries are expected to make revised client agreements available as soon as possible so that new clients can execute them and existing clients can amend or replace their existing agreements.”
All intermediaries’ client agreements must comply with the new Code of Conduct requirements, including incorporation of the new clause and observance of the new paragraph 6.5 of the Code of Conduct discussed in the Further Consultation, on or before 9 June 2017 (i.e., 18 months from 8 December 2015).
The SFC emphasises that the 18-month transitional period is mainly to cater for circumstances where intermediaries, despite their best efforts, encounter practical difficulties when re-executing agreements with existing clients. However, it is expected that intermediaries should be able to comply well before the end of the transitional period.
Comment
The new clause reads: “If we [the intermediary] solicit the sale of or recommend any financial product to you [the client], the financial product must be reasonably suitable for you having regard to your financial situation, investment experience and investment objectives. No other provision of this agreement or any other document we may ask you to sign and no statement we may ask you to make derogates from this clause.” The new clause is to be incorporated into client agreements pursuant to the new paragraph 6.2(i) under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.
For a copy of the consultation conclusion, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/conclusion?refNo=14CP7
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR120
6. Court dismisses appeal by a substantial shareholder against convictions for failing to make disclosure of interests
On 9 December 2015, the Court of First Instance upheld the conviction of Victory Group Limited’s substantial shareholder for breaching a duty of disclosure.
Background
The Court of First Instance has dismissed an appeal by Mr. Lam Fai Man, a substantial shareholder of Victory Group Limited (Victory), against his convictions for failing to disclose to Victory changes in his interests in the shares of Victory, as required by the Securities and Futures Ordinance.
Lam was convicted on 30 June 2015 after trial at the Eastern Magistracy and fined HK$12,000.
The Honourable Mr. Justice Zervos dismissed Lam’s argument that the trial magistrate erred in law in finding that Lam, who had delegated his duty of disclosure to his account executive, had failed to establish a defence of reasonable excuse for his failure to make disclosures to Victory.
The Court held that the legal obligation was on Lam to ensure that his duty of disclosure and notification was properly performed and that obligation remained on Lam, even if he delegated the task.
In his judgment, Mr. Justice Zervos said that, if a person who owes the duty delegates it to another, he must make sure that it is strictly complied with for he bears the ultimate responsibility and liability for any failure to perform the duty.
The SFC’s investigation is continuing.
For a copy of the judgement, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR121
7. SFC obtains interim court orders against Maxim Trader
On 11 December 2015, the SFC obtained interim orders against Maxim Trader who held out as carrying on regulated activities whilst unlicensed.
Background
The Court of First Instance has granted interim orders against Maxim Trader, following legal proceedings brought by the SFC against Maxim Capital Limited (Maxim Capital) and Maxim Trader under section 213 of the Securities and Futures Ordinance.
Interim orders were granted to restrain Maxim Trader from holding out as carrying on regulated activities whilst unlicensed and to suspend its websites that have been promoting the carrying out of regulated activities under the brand name “Maxim Trader”.
The case arose from the SFC’s investigation which found that Maxim Capital and Maxim Trader have solicited over 130 investors to invest more than HK$111 million in a number of investment schemes since 2013 that claimed to pay monthly returns from 3% to 8%.
The interim orders will remain in force until the trial of the proceedings, the date of which has yet to be fixed.
The SFC’s investigation is continuing.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR122
8. SFC reprimands and fines three JP Morgan entities a sum of HK$30 million for regulatory breaches
On 15 December 2015, the SFC reprimanded and fined three JP Morgan entities for failing to comply with rules and regulations in relation to short selling activities, client facilitation and principal trading business, and operation of dark liquidity pool trading services.
Background
The SFC has reprimanded J.P. Morgan Broking (Hong Kong) Limited (JPMBHK), J.P. Morgan Securities (Asia Pacific) Limited (JPMSAP) and J.P. Morgan Securities (Far East) Limited (JPMSFE) (collectively “JP Morgan”), and fined them HK$15 million, HK$12 million and HK$3 million respectively for various regulatory breaches and/or internal control failings.
An SFC investigation revealed that JP Morgan had failed to implement adequate systems and controls in its institutional equities business in Hong Kong to ensure compliance with the rules and regulations applicable to the following areas:
- short selling activities;
- client facilitation and principal trading business; and
- operation of dark liquidity pool trading services.
Short selling activities
Between May 2010 and February 2013, JPMBHK and JPMSAP had incorrectly aggregated the inventory positions controlled by a principal trading desk across two offshore affiliates in determining whether their position in a security is net long or net short. As a consequence, the two firms wrongly conducted over 41,000 uncovered short sale trades as long sale trades.Furthermore, contrary to the requirements under the Securities and Futures Ordinance (SFO), 34% of the short selling orders placed by JPMBHK and/or JPMSAP for their principal trading in May 2012 did not have the appropriate “documentary assurance” in place to confirm that the sales were covered when the short sell orders were placed.
Between May 2010 and February 2013, JPMBHK and JPMSAP had incorrectly aggregated the inventory positions controlled by a principal trading desk across two offshore affiliates in determining whether their position in a security is net long or net short. As a consequence, the two firms wrongly conducted over 41,000 uncovered short sale trades as long sale trades.Furthermore, contrary to the requirements under the Securities and Futures Ordinance (SFO), 34% of the short selling orders placed by JPMBHK and/or JPMSAP for their principal trading in May 2012 did not have the appropriate “documentary assurance” in place to confirm that the sales were covered when the short sell orders were placed.
Client facilitation and principal trading business
A review by the SFC found that, between January 2011 and December 2012, JPMSFE and JPMSAP did not have adequate systems and controls in place to prevent a client facilitation trade being executed without the client’s consent.
The SFC also found that JP Morgan granted seven facilitation traders and 14 principal traders incorrect access rights under its network shared drives and/or order management systems between January and December 2012. As a result, the facilitation and principal traders were able to view client order flow information beyond their defined access rights.
Furthermore, JP Morgan had set up a reporting structure with potential conflicts under which the trading desks responsible for handling agency orders had a reporting line to two senior managers who were also facilitation traders prior to August 2012. However, JP Morgan did not put in place effective systems and controls to guard against potential misuse or abuse of client agency order flow information by the facilitation traders.
Operation of dark liquidity pool trading services
In April 2011, the SFC granted approval to JPMBHK to carry on business in Type 7 (providing automated trading services) regulated activity. During and after the application process, JPMBHK represented to the SFC that its client-facing crossing engine, namely JPMX, was a pure agency-to-agency matching platform.
The SFC however found that numerous principal orders of JP Morgan were incorrectly routed into the agency pool of JPMX for matching between March and July 2012 due to human and systems errors. None of these orders were crossed in JPMX. There were also a number of instances where agency orders were incorrectly routed on two dates in August and December 2012 into a separate, non-client principal pool of JPMX. Some of these agency orders were crossed with principal orders in this separate pool but none of them were executed at a price lower than the prevailing best bid (for sell orders) or higher than the prevailing best ask (for buy orders) price of the Stock Exchange of Hong Kong Limited.
Many of the above failings were not identified or corrected until the SFC brought them to JP Morgan’s attention in the course of a SFC inspection into the business activities of JPMBHK and JPMSFE.
In determining this disciplinary action, the SFC took into account that JP Morgan:
- co-operated with the SFC in resolving the SFC’s concerns;
- has taken steps to rectify the concerns raised by the SFC;
- agreed to engage an independent reviewer to conduct a forward-looking review of the internal controls and systems of JP Morgan in respect of the areas mentioned above; and
- has a clean disciplinary record in relation to its regulated activities.
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=15PR123
9. SFC authorizes first batch of funds under Mainland-Hong Kong Mutual Recognition of Funds initiative
On 18 December 2015, the SFC granted authorization for the first batch of four Mainland funds under the Mainland-Hong Kong Mutual Recognition of Funds (MRF) initiative for public offering in Hong Kong.
Background
The SFC granted authorization for the first batch of four Mainland funds under the Mainland-Hong Kong Mutual Recognition of Funds (MRF) initiative for public offering in Hong Kong.
The SFC also welcomes the approval by the China Securities Regulatory Commission (CSRC) of the first batch of three Hong Kong funds for public offering on the Mainland market.
The MRF initiative is a major breakthrough in the opening up of the Mainland’s funds market to offshore funds. It will open up a new frontier for the Mainland and Hong Kong asset management industries and make available a wider selection of fund products to investors in both markets.
The SFC and the CSRC have been accepting MRF applications since 1 July 2015. The approval of the first batch of funds under the MRF is a milestone in the implementation of this important cross-border cooperation initiative.
Comment
As of 18 December 2015, the SFC has received over 30 applications of Mainland funds under the MRF initiative, and the CSRC has received 17 applications of Hong Kong funds under the MRF initiative.
For a list of the Mainland funds authorized by the SFC for public offering in Hong Kong under MRF, please refer to:
http://www.sfc.hk/productlistWeb/searchProduct/UTMF.do
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR124
10. Takeovers Panel rules on general offer obligation for The Cross-Harbour (Holdings) Limited
On 21 December 2015, the Takeovers and Mergers Panel ruled that Mr. Cheung Chung Kiu (Mr. Cheung) will become subject to a general offer obligation if he proceeds acquiring controlling shareholder interest in The Cross-Harbour (Holdings) Limited.
Background
The Takeovers and Mergers Panel (the Panel) has ruled that a general offer obligation under the Takeovers Code will arise if Mr. Cheung proceeds with the possible acquisition of a controlling shareholder interest in The Cross-Harbour (Holdings) Limited. The Panel also agreed with the Takeovers Executive that a waiver of such general offer obligation should not be granted.
The Takeovers Executive received an application for a ruling regarding the possible acquisition and referred the matter to the Panel as there were particularly novel, important or difficult points at issue. The Panel met on 7 December 2015 to consider the referral.
For a copy of the Panel’s decision, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR125
11. SFC bans Suen King Shan for four years
On 22 December 2015, the SFC banned Mr. Suen King Shan (Suen) from re-entering the industry for four years until 21 December 2019 over breaches of the SFC’s Code of Conduct.
Background
The SFC found that Suen had failed to perform proper account opening procedures in relation to the accounts (Nominee Accounts) opened in the names of his mother, his aunt and his cousin-in-law (Nominees) at his then employer, Ko’s Brother Securities Company Limited (Ko’s Brother Securities). Despite being their account executive at the material time, he did not conduct know-your-client procedures with the Nominees and left the account opening matters to his wife, who was not a staff member of Ko’s Brother Securities. He also falsely declared on his mother’s account opening forms that he had witnessed her signature and explained the contents of the risk disclosure statement to her.
Moreover, Suen was found to have executed his wife’s instructions to place orders in the Nominee Accounts without verifying whether the transactions were authorized by the Nominees. Suen’s wife did not have the required authorization to operate the Nominee Accounts at the material time.
Furthermore, Suen was found to have conducted personal trading in the Nominee Account opened in the name of his cousin-in-law. In doing so, he concealed his beneficial interest and personal trading activities in this account, in breach of the employee code of share trading of Ko’s Brother Securities.
The SFC is of the view that Suen’s conduct was in breach of the Code of Conduct and called into question his fitness and properness to be a licensed person.
In deciding the penalty, the SFC took into account all relevant circumstances, including that:
- Suen’s conduct was dishonest and he had abused the trust that Ko’s Brother Securities had placed in him;
- his conduct had made it possible for his wife to open the Nominee Accounts and carry out personal trading in them;
- he was an experienced practitioner and as such, he either knew or ought to have known that his conduct was improper;
- his misconduct was serious even though no reported loss was suffered by the clients; and
- he had no previous disciplinary record with the SFC.
Comment
General Principles 1 and 2 of the Code of Conduct require licensed persons to act honestly, fairly, with due skill, care and diligence, and in the best interests of their clients and the integrity of the market, in conducting their business activities; licensed persons are required under paragraph 5.1 of the Code of Conduct to take all reasonable steps to establish the true and full identity of their clients and their financial situation, investment experience and investment objectives; at the material time, under paragraph 7.1 of the Code of Conduct, a licensed person should not effect a transaction for a client unless before the transaction is effected the client, or a person designated by the client, has specifically authorized the transaction, or the client has authorized in writing the licensed or registered person to effect transactions for the client without the client’s specific authorization. (Paragraph 7.1 of the Code of Conduct has been amended since 1 December 2012).
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR126
12. SFC signs MoU with CFTC to enhance supervision of Cross-Border Regulated Entities
On 23 December 2015, the SFC signed a memorandum of understanding (MoU) with the Commodity Futures Trading Commission (CFTC) to enhance supervision of cross-border regulated entities in Hong Kong and in the United States.
Background
The SFC has entered into a MoU with the CFTC regarding cooperation and the exchange of information in the supervision and oversight of regulated entities that operate on a cross-border basis in Hong Kong and in the United States.
Through the MoU, which covers regulated markets and organised trading platforms, central counterparties, intermediaries, dealers and other market participants, the SFC and the CFTC express their willingness to cooperate with each other in the interest of fulfilling their respective regulatory mandates.
For a copy of the memorandum of understanding, please refer to:
http://www.sfc.hk/web/EN/files/ER/PDF/MOU/MOU_U.%20S%20Commodity_Dec%202015.pdf
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR127
13. SFC suspends Fabiano Hugues Joseph Mascolo for three months
On 23 December 2015, the SFC announced that Mr. Fabiano Hugues Joseph Mascolo who breached the Code of Conduct has been suspended for three months.
Background
The SFC has suspended Mr. Fabiano Hugues Joseph Mascolo for three months from 21 December 2015 to 20 March 2016.
The disciplinary action follows a SFC investigation which found that in October 2013, Mascolo, who was an employee of BTIG Hong Kong Limited at the material time, received order instructions from a client via WhatsApp messaging on his mobile phone. In doing so, Mascolo was in breach of BTIG’s internal control policy.
The SFC also found that between April 2010 and September 2013, Mascolo allowed a friend, who was a licensed representative of another firm, to use his personal securities account at a brokerage firm to conduct personal trades without obtaining prior written consent from his friend’s then employers.
Mascolo’s conduct, in breach of the Code of Conduct, made it difficult for his employer to properly monitor his trading activities and to ensure compliance with regulatory requirements.
His conduct also made it impossible for his friend’s employers to identify and effectively monitor his friend’s personal trading activities to ensure there were no conflicts of interests or other malpractices arising from his personal trading.
Comment
General Principle 2 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission provides that in conducting its business activities, a licensed or registered person should act with due skill, care and diligence, in the best interests of its clients and the integrity of the market.
Paragraph 12.2(c) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission requires that a licensed or registered person should not knowingly deal in securities or futures contracts for another licensed or registered person’s employee unless it has received written consent from that licensed or registered person.
For a copy of the memorandum of understanding, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR128
The article is for general information purpose only and is not intended to constitute legal or other professional advice.
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